Low investment in Ghana due to high lending rates – Investment Banker
A renowned investment banking consultant and financial economist, Dr Sam Mensah has indicated that low investment in the country’s economy is due to high interest rates offered by banks to borrowers.
According to Dr Mensah, who is also the Chief Executive Officer of SEM Group Limited, an investment advisory firm, the average lending rates of banks in Ghana have been in the region of about 27% which makes it difficult for businesses to invest in the economy.
“If businesses are going to invest, they need to invest in a project that has a rate of higher returns to enable them pay back the loan and make profit,” said Dr Mensah at a World Bank organised meeting in Accra this week.
“If your average lending rate is 27%, then the project has to generate at least 27% of profit just to pay the bank without you paying yourself,” he emphasized.
According to him, economies grow by the number of investments they receive for the various sectors but if there are low investments, the economy finds it difficult to rise.
“We know that the economy grows by investments,” he added.
So for that reason, investment rates in Ghana are quiet low because there are too many projects that will need to generate 27% of profits to pay back loans and leave something small for an entrepreneur, he said.
He said in most efficient banking systems, the interest rate spread is very narrow, citing Canada as one of the countries where the spread between borrowing and lending is about 2% to 3%.
“But in Ghana, in the few months, the spread has been about 18%…if you compare that to the average rate in the sub-Saharan Africa which is about 12% with Kenya having 8.8%, Tanzania 7% and Nigeria 5%, by all standards Ghana’s interest rate spread is extremely high”, he reiterated.
Professor Cletus Dordonu, speaking at the same function indicated that interest rate spreads should be legislated to force banks to offer low interest rates to borrowers as it was done in Nigeria and China.
But former Minister of State at the Finance Ministry, Dr. Akoto-Osei raised a caution by saying “Ghana is not Nigeria or China and so if it worked in both countries, it does not mean it will work here.”
The deputy Head of the Financial Stability Department at the Bank of Ghana, Mr. Settor Amediku revealed that the bank has met over this issue at the last Monetary Policy Committee meeting but no conclusion has been drawn yet.
Investment in the country for the first quarter of 2011 recorded 109 businesses with an estimated value of $378.44 million, the Ghana Investment Promotion Centre (GIPC) figures show.
Investments into Ghana as at 2010 reached over $1.5 billion with 3,597 registered projects.
By Ekow Quandzie
Canada’s borrowing spread of 2% and 3% is excellent, Ghana should learn from Canada especially in the financial sector. During recent Financial meltdown Canada was the only country which has solid financial stability to withstand the global financial issues among the G7. USA, Europe and the rest of the world are still struggling especially the US with lack of proper regulatory laws governing borrowing. With cheap money in US people were digging themselves into debts.
Canada is resource based just like Ghana, Australia etc and a lot can be learn from Canada, Obama said.
“Na who’s Fault”, Mr. Mensah. It is a problem from the set up of the banking sysytem in the country. Our govt and the banking system had never done anything good when it comes to savings. They have killed the appetite of savings in the economy. Look around and you will see that Ghanaian contributions in big projects are negligible. We are always depending on foreigners to invest in these projects. If 10million people can save 5 cedis/month; we talking of 50million cedis. One don’t need to save big money. We have to encourage savings. Even one cedi a week will earn something at the bank. What we need is educating the public.
The stability of the cedi agaist the dollar is another sign the lending rate is so huge. The local people don’t have the cash so the banks have to give high interest rate to get funds to go around. Hence they have to charge high to lend to borrowers like you and me.
Not all, the risk of individuals borrowing also adds to the hike of the lending rates. Egya Atta has to come up with some sound policies to curb the hikes down. Invest but choose the right investment.